The Irish Economic Update

Economy Continues To Perform

Well Despite Concerns Over Brexit

January 2017

Oliver Mangan

Chief Economist

AIB

1

Strong recovery by Irish economy since 2013

� Irish economy boomed from 1993 to 2007 with GDP up by over 250% – Celtic Tiger

� Very severe recession in Ireland in 2008-2009. GDP fell by 8% and GNP down 10%

� Collapse in construction activity and banking system, severe fiscal tightening, high

unemployment. Ireland entered a 3 year EU/IMF assistance programme from 2010-2013

� GDP at end of 2008-09 recession still over 25% higher than in 2001, highlighting that the

economic crash came after a very strong period of growth, unlike in other countries

� Ireland tackled its problems aggressively in the public finances, banking sector and property

market. Imbalances in economy unwound – housing, debt levels, competitiveness, BoP

� Ireland focused on generating growth via its large export base as the route to recovery

� Economy rebounds strongly in 2013-16 period. (Note 2015 GDP/GNP data distorted)

� Domestic economy has recovered strongly, led by rebound in investment and retail spending

� Core domestic demand averaged growth of 4% in the period 2013-15

� Strong jobs growth. Unemployment rate fallen from 15% in 2012 to 7.3% in late 2016

� Budget deficit has declined at quicker than expected pace. Circa 1% of GDP in 20162

Economy performed well again in 2016

� GDP growth averaged strong 4.5% year-on-year in Q1-Q3 2016

� Manufacturing PMI weakened appreciably around mid-year but rebounded strongly in Q4’16

� Strong rebound by services PMI at end 2016 after marked decline post Brexit vote in UK

� Slower growth in service exports of 6.5% yoy in Q1-Q3 2016 after a big rise in 2015

� Construction PMI performed strongly in 2016 – averaged around 60.

� Consumer confidence strong but has fallen back somewhat from 15 year highs hit in Q1’16

� Consumer spending up 3.2% yoy in Q1-Q3 2016 – strong retail spending last year

� New car sales rose by 17.5% in 2016 after 30% jump in both 2014 and 2015

� Housing completions up by 17% yoy in first ten months of 2016

� Mortgage lending picks up strongly in 2016 after slowing in 2015 on new CB lending rules

� Strong employment growth in 2016 – up 2.9% yoy in both Q2 and Q3

� Live Register continues to fall. Jobless rate down to 7.2% in December – peaked at 15.1%

� Slower growth in tax receipts since early summer but finished well ahead of target in 2016 3

UK Brexit vote had limited impact on Irish data

4

30

35

40

45

50

55

60

65

70

Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16

Ireland Mfg and Services PMIs

Source: Thomson Datastream, Investec

Services

Manufacturing

-10

-8

-6

-4

-2

0

2

4

6

8

10

Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016(e)

Irish Retail Sales (ex-autos) - Volume, YoY, %

Source: Thomson Datastream

%

20

40

60

80

100

120

Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Consumer Confidence (ESRI - KBC)

Source: ESRI - KBC, Thomson Datastream

-8

-6

-4

-2

0

2

4

6

8

Q3-07 Q3-08 Q3-09 Q3-10 Q3-11 Q3-12 Q3-13 Q3-14 Q3-15 Q3-16

Consumer Spending (Vol) 3 Qtr MA Y/Y

Source: CSO

%

Strong jobs growth continues; unemployment falls

Year Average 2013 2014 2015 2016(f) 2017(f) 2018(f)

Unemployment Rate % 13.1 11.3 9.5 8.1 7.2 6.6

Labour Force Growth % 0.4 -0.3 0.5 1.2 1.2 1.1

Employment Growth % 2.4* 1.7 2.6 2.8 2.1 1.7

Net Migration : Year to April (‘000) -33.1 -21.4 -11.6 3.0 10.0 15.0

Source: CSO and AIB ERU forecasts* Employment ex Agriculture +1.3% in 2013

5-12

-10

-8

-6

-4

-2

0

2

4

6

Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 2016Q3

Employment (% Change YoY)

Public

Private

Total

Source: Thomson Datastream

4

6

8

10

12

14

16

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Unemployment Rate (%)

Source: Thomson Datastream

%

Large Irish export base performs well

� Ireland a very open economy – exports, driven by huge FDI, equate to well over 100% of GDP

� Major gains in Irish competitiveness since 2009, with weakening of euro also helpful

� Exports have risen strongly, helped by large FDI inflows and recovery in global economy

� Sterling’s sharp fall a challenge for exports to UK

-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14

Germany

France

Italy

Eurozone

UK

Ireland

Spain

Portugal

Unit Labour Costs 2009-2013 (% Change)

Source: EU Commission

0 10 20 30 40 50 60 70 80 90 100 110

Spain

Portugal

Ireland

Italy

France

Germany

UK

Finland

Exports as % of GDP

Source: Thomson Datastream

6-5

0

5

10

15

20

Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3-2015 Q3-2016

Irish Exports of Services(Volume, 3 Qtr Moving Average, YoY% Change)

Source : CSO

FDI and the Irish economy

KEY FDI IMPACTS ON THE IRISH ECONOMY

- 1,200 multinational companies- €150bn Exports (64% of Irish exports)- 200,000 Jobs in FDI, 340,000 in total- 70% of Corporation Tax- €8.7bn Spending on Irish services/materials- €10bn in Payroll- 67% of Business R&D expenditure

TRUMP TAX CHANGES SHOULD NOT HIT FDI

- US firms have well established operations here- Need highly skilled, multi-lingual workforce- Firms do not move Ireland to avoid US tax- Ireland is base to service their European markets- Easier to operate in local rather than US time zone- Risk of protectionism means need bases abroad- No certainty about future US tax policy- More likely to repatriate profits if US taxes cut

WHAT ATTRACTS FDI TO IRELAND?

- Access to European markets- Low corporate tax rate of 12.5%- English speaking country- Well educated, flexible workforce- Common law legal system- Stable political framework- Long history of successful FDI- Easy access to decision makers

- 8 of the top 10 in ICT - 9 of the top 10 in Pharmaceuticals - 17 of the top 25 in Medical Devices- 3 of the top 5 Games companies- 10 of the ‘top born on the Internet’ firms - More than 50% of the world’s leading Financial fir ms

WORLD LEADERS CHOOSE IRELAND

7

Many top global companies have big operations in Ireland

8

Slower growth by domestic economy last year

� Domestic economy contracted by 20% from 2008-12

� Collapse in construction was big drag on GDP - fell

from 13.5% of GDP in 2005-07 to 5.3% by 2012

� Construction has seen steady growth since 2013 of

circa 10% per annum – continued in 2016

� Business investment (ex planes/R&D) more than

doubled in 2013-2015 but fell back in 2016

� Consumer spending grew by 1.7% in 2014, 4.5% in

2015 and 3.2% yoy in Q1-Q3 2016

� Core domestic spending (ex aircraft, R&D,

Intangibles) averaged growth of 4.4% in 2013-2015

� Slower growth of 3% yoy in core domestic spending

in Q1-Q3 2016 as business investment declined

� Core retail sales rising strongly again towards end

2016 after slowing on Brexit vote around mid-year9

-40

-30

-20

-10

0

10

20

Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016

Construction Investment (3 Qtr MA, % YoY)

Source : CSO

%

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016

Core Domestic Spending* (3 Qtr MA, % Yr-on-Yr)

Source: CSO, AIB ERU Calculations*Domestic Spending excluding investment in aircraft and intangibles

%

House prices rebound as big housing shortage emerges

� House prices declined by a very sharp 55%

between their peak in late 2007 and early 2013

� House prices rebound: up 48.5% by Oct 2016 from

low in early 2013 as big housing shortage emerges

� 90% decline in housing output. Supply overhang

eliminated and low level of stock for sale now

� Dublin prices up by 65% from trough, with non-

Dublin prices up by 45%

� House prices, though, including in Dublin, are still

some 32% below peak levels hit in 2007

� Central Bank mortgage rules cooled Dublin house

price inflation in 2015– fell from 25% to 3% yoy

� House prices inflation picked up somewhat in 2016.

Prices up 7% yoy nationally in October, Dublin 5.5%

� Rents have also rebounded strongly – now 11.5 %

above previous peak reached in 2008 10

-25

-20

-15

-10

-5

0

5

10

15

20

25

-5

-4

-3

-2

-1

0

1

2

3

4

5

Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

National House Price Inflation

Month-on-month : LHS Year-on-Year : RHS Source: CSO via Thomson Datastream

% %

40

60

80

100

120

140

Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

Irish Residential Property Price Indices(Base 100 = Jan'05)

National Prices Ex-Dublin Prices Dublin Prices Source: CSO via Thomson Datastream

House building rising only slowly from very low levels

� Housing completions at 12,700 in 2015, up from

11,000 in 2014 and 8,300 in 2013

� Completions up 17% to Oct 2016. Should reach

15,000 units last year but still at low level

� Annual demand estimated at 25,000-30,000 units

� Measures being put in place to boost new house

building. More Local Authority and NAMA building

� Central bank lending rules relaxed while tax rebates

introduced in budget to help fund deposits for FTB

� Mortgage lending has picked up after slowing in

2015/early 2016 on introduction of CB rules

� Housing affordability helped by low mortgage rates

� Improving trend in new housing starts a positive sign

that housing completions will continue rising

� However, likely to be 2018/19 before housing output

rises to 25,000 units or above 115

10

15

20

25

30

Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16

Housing Repayment Affordability *

Source: AIB, Permanent TSB/ESRI, CSO, Dept. of Finance

%

* % of disposible income required for mortgage repayments for 2 income household, 30 year 90% mortgage. Based on Permanent TSB/ESRI national house price & CSO residential property price index

AIB Model of Potential Housing Demand

Calendar Year 2012 2013 2014 2015 2016 2017 2018

Household Formation

14,000 15,000 16,500 19,500 21,500 22,000 23,000

of which

Indigenous Population Growth

20,000 17,500 17,000 17,500 17,000 16,000 15,500

Migration Flows -9,000 -5,500 -3,500 -1,500 1,000 2,500 3,500

Increased Headship

3,000 3,000 3,000 3,500 3,500 3,500 4,000

Second Homes 1,000 1,000 1,000 1,000 1,000 1,500 1,500

Replacement of Obsolete Units

4,000 4,000 4,500 4,500 4,500 5,000 5,500

Total POTENTIALDemand

19,000 20,000 22,000 25,000 27,000 28,500 30,000

Completions 8,500 8,300 11,000 12,700 15,000 19,000 24,000

POTENTIALImpact on Vacant Stock

-10,500 -11,700 -11,000 -12,300 -12,000 -9,500 -6,000

Sources: CSO, DoECLG, AIB ERU 12

Gov debt ratio falling, private sector deleveraging

50

75

100

125

150

175

200

225

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Irish Private Sector Credit (Inc Securitisations) a s % GDP%

Sources: Central Bank, CSO, AIB ERU Calculations ( Note Inflated/Distorted GDP figs in 2015/16)

0

2

4

6

8

10

1980 1985 1990 1995 2000 2005 2010 2015 2020

Gov Debt Interest (% GDP)

Source: NTMA; Dept of Finance

%

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013 2014 2015 2016(f)2017(f)2018(f)2019(f)2020(f)

Gross Gen Gov Debt (% GDP)

Source: Dept of Finance. (Note Inflated/Distorted GDP figues from 2015)

13100

120

140

160

180

200

220

240

Q2 2002 Q2 2004 Q2 2006 Q2 2008 Q2 2010 Q2 2012 Q2 2014 Q2 2016

Irish Household Debt (% of Disposible Income)

Source: CSO, Central Bank, AIB ERU

%

Budget deficit falls to very low level

� Some €30bn (18% of GDP) of fiscal tightening

implemented in 2008-2014 period

� Fiscal policy now mildly expansionary

� Budget deficit falls sharply in recent years

� Deficit of some 1% of GDP in 2016

� Budget deficit forecast at below 0.5% of GDP

for 2017 and 2018

� Primary budget (i.e. excluding debt interest)

surplus of around 1.5% of GDP in 2016

� Debt interest costs low – circa 2.5% of GDP

� Gross Gov Debt/GDP ratio in marked decline

� Irish bonds yields have fallen to very low levels

� Sovereign debt ratings upgraded; S&P have

Ireland at A+, Fitch at A, Moody’s A3

-12

-10

-8

-6

-4

-2

0

2

2008 2009 2010 2011 2012 2013 2014 2015 2016(f)2017(f)2018(f)2019(f)2020(f)

General Government Balance* (% GDP)

Sources : Dept of Finance*Excludes banking recapitalisation costs in 2009-11

14-2

0

2

4

6

8

10

12

14

16

18

-2

0

2

4

6

8

10

12

14

16

18

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Irish Benchmark Yields

5 Year 10 Year Source: Thomson Reuters

% %

Trade with UK equates to 35%

of Irish GDP. Thus, it is a key

trading partner

UK takes 43% of Irish

indigenous firm exports, so

very important trading partner

Expected negative impact of

Brexit on UK economy will have

knock-on effect in Ireland

Sterling has fallen sharply on

Brexit concerns, which will hit

exports to UK

• Sterling has fallen sharply on Brexit

concerns, which will hit exports to UK

• Also impacts Irish firms competing

with UK exports to Ireland and third

country markets

• Cross border trade picks up as

shoppers head North following

sterling's big fall

• Sterling weakness will also have a

significant impact on cross-border

businesses like hotels, restaurants

• Brexit has serious implications given

close economic/trade links with UK

• Trade with UK equates to 35% of

Irish GDP. Thus, it is a key trading

partner

• UK takes 43% of Irish indigenous

firm exports, so very important

trading partner

• Expected negative impact of Brexit

on UK economy will have knock-on

effect in Ireland

• Agri, tourism, energy, retailing,

financial sector most likely to be

impacted by Brexit

• Higher trading costs from more

administration, differing trade rules

and regulations, compliance costs,

possible customs duties and tariffs

when UK leaves EU

• Brexit could impact considerable

cross-country investment between

UK and Ireland.

• Border with Northern Ireland would

become an external EU land border

• Ireland will lose key ally within EU

when UK leaves as share similar views

on taxation, regulation, state

involvement in economy etc.

Brexit is a major headache for Ireland

15

Ireland hopes that hard Brexit will be avoided

� Key will be the trade arrangements put in place between EU and UK post Brexit

� Ideally, UK would retain access to Single Market and UK/Irish common travel area remains

� Indications from EU that talks on new trade deal can only begin after UK leaves

� Thus, exit deal likely to contain only transition or interim arrangements on trade

� UK Government has put the emphasis on regaining control over immigration and return of full

sovereignty and thus could lose access to Single Market – hard Brexit

� An interim/transitional trade deal will be difficult to conclude if UK continues to insist on

regaining control over immigration and full independence for country

� Hard Brexit would see UK leaving the EU Customs Union and Single Market

� UK would have to fall back on WTO rules in a hard Brexit, which require a common set of tariff

rates to be applied to all countries where no free trade deals exits

� This would be bad news for Irish/UK trade as could see imposition of tariffs, customs duties

� Main upside is that Brexit would make Ireland more attractive for FDI vis-à-vis the UK

� Lower Irish growth likely during 2016-19 in run-up to Brexit

� Long term impact will depend on the trade arrangements put in place post-Brexit 16

Somewhat slower Irish growth likely ahead of Brexit

� Rebound by Irish economy should continue

� Construction picking up from still low output levels

� Budgetary policy turns mildly expansionary

� Activity supported by low interest rate environment

� FDI strong despite concerns on corporate tax

� Irish inflation remains very low, below that of the

Eurozone and UK

� OECD and IMF forecasting that global growth will

improve in 2017 and 2018

� However, Brexit is a major challenge for economy

� Sharp fall in sterling impacting exports to UK,

tourism from UK, firms competing with UK imports

� Irish economy slowed somewhat in 2016 on weaker

global activity, sterling’s fall and Brexit uncertainty

� Irish GDP growth forecast to slow further to 3.0-3.5%

in 2017-19 period as Brexit continues to impact17

-4

-2

0

2

4

6

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Irish, Eurozone & UK Inflation (HICP Rates)

Ireland

Eurozone

Source: Thomson Datastream

UK

0.68

0.72

0.76

0.80

0.84

0.88

0.92

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Source: Thomson Datastream

Euro / Sterling Exchange Rate£

Actual Brexit could have big impact on Irish economy

� ESRI-D/Finance estimate Irish output would be reduced by over 2% on a soft Brexit

� Sharp fall-off in trade with UK likely on a hard Brexit

� Output almost 4.0 % lower over time if there is hard Brexit and a fall back on WTO rules

� Employment 2% lower and unemployment nearly 2% higher 18

% change in real terms unless stated

2013 2014 2015 2016 (f) 2017 (f) 2018 (f)

GDP 1.1 8.5 26.3 4.5 3.5 3.0

GNP 4.7 9.2 18.7 8.0 3.5 3.0

Personal Consumption -0.8 1.7 4.5 3.2 3.0 2.5

Government Spending 0.1 5.4 1.1 4.5 1.5 1.5

Fixed Investment -5.4 18.2 32.7 6.0 6.0 5.5

Core Fixed Investment* 22.6 14.4 18.3 -1.0 6.0 5.5

Core Domestic Spending* 2.3 4.2 6.6 3.0 3.7 3.3

Exports 3.1 14.4 34.4 2.5 4.0 4.0

Imports 1.1 15.3 21.7 2.5 4.0 4.0

HICP Inflation (%) 0.5 0.3 0.0 -0.2 0.5 0.8

Unemployment Rate (%) 13.1 11.3 9.5 8.1 7.2 6.7

Budget Balance (% GDP) -5.5 -3.7 -1.8 -0.9 -0.5 -0.3

Gross General Gov Debt (% GDP) 119.5 105.2 78.7 76 73 70

Source: CSO, AIB ERU Forecasts

AIB Irish Economic Forecasts

*Excludes investment in aircraft and intangibles 19

Risks to the Irish economic recovery

� Main risks to Irish recovery no longer internal but external, in particular Brexit

� Brexit major issue for Ireland given its strong trading links with UK and sharp fall by sterling

� Recovery in the global economy still quite fragile, with on-going risks and headwinds, including

weakness of emerging economies. Ireland vulnerable to any shocks that impacts its exports

� Possibility of reduced FDI from US if a new Trump administration slashes corporate taxes

� Questions around corporation tax regime (eg Apple ruling) could impact FDI but seems unlikely

� Supply constraints in the construction sector, especially new house building, which is recovering

at a very slow pace and remains at depressed levels

� Competitiveness issues - high house prices, high rents, high personal taxes

� Continuing credit contraction – fewer banks, tighter credit conditions, on-going deleveraging

Note: All Irish data in tables are sourced from the CSO unless otherwise stated. Non-Irish data are from the IMF, OECD and Thomson Financial. Irish forecasts are from AIB Economic Research Unit. This presentation is for information purposes and is not an invitation to deal. The information is believed to be reliable but is not guaranteed. Any expressions of opinions are subject to change without notice. This presentation is not to be reproduced in whole or in part without prior permission. In the Republic of Ireland it is distributed by Allied Irish Banks, p.l.c. In the UK it is distributed by Allied Irish Banks, plc and Allied Irish Banks (GB). In Northern Ireland it is distributed by First Trust Bank. In the United States of America it is distributed by Allied Irish Banks, plc. Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Allied Irish Bank (GB) and First Trust Bank are trade marks used under licence by AIB Group (UK) p.l.c. (a wholly owned subsidiary of Allied Irish Banks, p.l.c.), incorporated in Northern Ireland. Registered Office 92 Ann Street, Belfast BT1 3HH. Registered Number NI 018800. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In the United States of America, Allied Irish Banks, p.l.c., New York Branch, is a branch licensed by the New York State Department of Financial Services. Deposits and other investment products are not FDIC insured, they are not guaranteed by any bank and they may lose value. Please note that telephone calls may be recorded in line with market practice. 20